Chewing up poison pill

Broadcom first approached Emulex late last year, it has emerged, but Emulex broke these off and adopted a poison pill defense to thwart any unwanted bid. Broadcom has now gone public with its desire for the firm, setting the scene for a bruising takeover battle.

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Emulex makes Fibre Channel host bus adapters (HBAs), connecting servers to Fibre Channel SAN fabrics, and also InSpeed chips to connect controllers and drives inside storage arrays. It also has Fibre Channel over Ethernet (FCoE) technology and has developed a single chip ASIC used in a converged network adapter (CNA) that combines Ethernet and FCoE functionality for a server connecting to Ethernet.

According to Stifel Nicolaus analyst Aaron Rakers, the bid offer is at a premium of about 40 per cent on yesterday's closing share price for Emulex, $6.61, giving it a market capitalisation of $537m.

He says: "Emulex does have a poison pill defense that was installed in January of this year." He believes that "the company would face some strategic and fundamental challenges going forward with regard to its positioning in blade servers." He reckons QLogic is better positioned in FCoE and that Emulex faces potential prtoblems in its Embedded Storage Product (ESP) division, the one making the InSpeed chips.

Broadcom is a fabless designer of semiconductors for wired and wireless communications claiming to "provide the industry's broadest portfolio of state-of-the-art, system-on-a-chip and software solutions to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices."

It had 2008 revenue of $4.66bn but is being hit by the recession, losing about $92m, or £0.19/share, in the first quarter, compared to a $74m profit ($0.14/share) in the year-ago quarter.

Broadcom believes it holds "one of the broadest intellectual property portfolios addressing both wired and wireless transmission of voice, video and data." But it doesn't have FCoE IP.

Any player in the data centre converged IT market, especially an Ethernet switch supplier, simply has to have FCoE or it looks condemned to be a niche, sidelined player in future. There are four companies Broadcom could buy for FCoE: first is Cisco. Okay, three companies: Brocade, Emulex and QLogic.

SAN switch and director supplier Brocade has just bought its own Ethernet networking company, Foundry, and has recently entered the HBA and CNA market, putting pressure on Emulex and QLogic. It makes some Fibre Channel switches as well as HBAs and CNAs and also has InfiniBand interests. QLogic has to have been looked at by Broadcom.

Emulex looks vulnerable because it is confined to two niche markets, the HBA/CNA one into which Brocade has entered, and the switching market inside storage arrays which is threatened by SAS fabrics.

Broadcom said its "leadership in Ethernet networking, together with Emulex’s deeper expertise in Fibre Channel storage networking, will enable the combined company to accelerate the development of converged solutions for enterprise networks."

The bid is most definitely not friendly, as a letter from Broadcom CEO Scott McGregor to Emulex executive chairman Paul Folino makes clear:

"As you know, we have believed for some time that a combination of our two companies would benefit both companies’ shareholders and the customers we serve. With that strategic opportunity to meet the needs of the market in mind, we sought to engage you and your Board of Directors in discussions in late December regarding a potential combination of Emulex with Broadcom."

"We were disappointed when, in early January, you responded that the company was not for sale and abruptly cut off the possibility of further discussions. Even more troubling was the fact that merely one week after that communication, you took actions clearly designed to thwart the ability of your shareholders to receive a premium for their shares. These included adopting a “poison-pill” and amending your bylaws.

"It is difficult for us to understand why Emulex’s Board of Directors has not been open to consideration of a combination of our respective companies. We would much prefer to have engaged in mutual and constructive discussions with you. However this opportunity is in our view so compelling we now feel we must share our proposal publicly with your shareholders."

In other words the bid is hostile.

There is speculation that Brocade could be interested in Emulex as well.

Emulex has not commented on the bid. Consolidation is running rampant in the IT industry. Who knows what will happen next. &reg